The average established real estate investor makes six figures in a given year. With this much money, it’s easy to why reinvesting rental income would be beneficial.
But, what about real estate investors who are just starting out? Not all of us make six figures.
Well, it turns out that reinvesting rent income may be beneficial regardless of the amount of money that you’re making.
Keep reading to learn more.
How to Invest Rental Income
Passive income is one of the best ways to achieve financial freedom. But, there’s more money for you to make if you reinvest your passive income.
To figure out whether reinvesting rent income is worth it, you need to get an idea of where to reinvest rental income.
1. Buy Another Investment Property
Many real estate investors decide to reinvest their money into buying more properties. After all, buying more properties can lead to more income as more people pay rent to stay at your properties.
You should be careful not to stretch your money too far. Some investors place too much money into obtaining properties before they can take care of the properties that they currently have.
If you’re planning on opening a mortgage for another property, you should make sure that you can supply a minimum down payment of 20%. And, this payment shouldn’t completely clear out your business’s savings.
You should have plenty to continue caring for your existing properties, especially in the event of an emergency.
2. Invest in Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) allow real estate investors to invest in properties without owning or caring for the physical property itself. Rather than buying the property itself, you’d be buying a share of a company that invests in real estate.
High-quality REITs can produce a yield between 6% and 8% with consistent growth over time.
Overall, REITs give high dividends while hedging against inflation. If you want to compound your returns, you can also reinvest your earned dividends back into the REIT.
3. Remodel One of Your Existing Properties
Another way to reinvest your real estate income is by remodeling (flipping) a property that you already own. You may consider a kitchen upgrade or a bathroom remodel.
Remodeling one of your properties can help increase the value of that property. That means that you’ll be able to make more from the property in terms of rent.
Even if you’re planning on selling the property later, you’d be increasing the resale value.
4. Become a Private Lender
Another popular choice for real estate investors is reinvesting their earned money into others. Whether you choose to work with other real estate investors or others, you could make money by loaning money out as a private lender.
Private lenders make returns by earning interest. And, they receive regular payments from those who are borrowing money from them. So, this could act as a steady stream of income.
Benefits of Investing Passive Income
Now that you know what to do with rental income, you can evaluate some of the benefits that come with it.
Some people believe that reinvesting money means losing it. But, it allows the money to have the opportunity to grow.
1. You Can Scale Your Income
Reinvesting can help you scale your income. As you make money from your existing properties, you can reinvest that money into new properties.
This will help you accumulate more properties over time. You could even work to buy more expensive properties that would improve the impression of your portfolio.
Even if you reinvest a small number of your earnings back into your real estate business, it could help you buy another property.
2. You Can Make Additional Income
As you acquire more properties, you’ll make more money in return. There will be more people renting from you. So, you’ll be able to make even more with these new properties you’ll be able to accumulate.
If you decide to invest in higher-end properties, you’ll be able to make more money on a fewer number of properties.
3. You Can Get Better Loan Terms
Many real estate investors juggle more than one mortgage at a time. If you’re picking up mortgages, you need to make sure that you’re making the best down payment you can in order to reduce your interest payments.
Reinvesting your earned money into new mortgages for new properties can help you get better loan terms for those mortgages. If you pay at least 20% for the down payment, you can avoid paying private mortgage insurance while decreasing the interest and principal that you’ll owe on the loan.
Overall, you’ll be paying less for any new properties that you’re investing in.
Tax Implications of Reinvesting Passive Income
Real estate investors can use their passive rent income as a tax shelter to reduce the amount of their income that gets taxed.
Reinvesting your profit back into the real estate industry can help you take advantage of some of these real estate tax breaks.
Decide Whether Reinvesting Rental Income Is Right for You
Whether you should reinvest your rent income depends on how much income you’re making.
You should calculate how much money it would take for you to maintain your company. Then, think about how much you’d like to set aside for emergency situations.
If you’re making more than both of these amounts combined, your business is considered financially stable. This means that you should consider investing your extra money into one of the options we mentioned above.
The exact option that you choose will depend on your personal interests as a real estate investor.
How to Maximize Rent Income
If you’re thinking about reinvesting your rent income, you should consider working with Memphis Investment Properties. Once you’re preapproved, you can pick a property. Then, Memphis Investment Properties will provide the property management services required to keep the home running.
From there, you’ll get cash flow from the property you chose.
If you’re interested in getting started, check out the process. If you decide to reinvest your rent income, we’re here to help you along the way.